Investors willing to pay for big earnings in future

Investors willing to pay for big earnings in future

THE Kuala Lumpur Composite Index (KLCI) is on the cusp of charting a new all-time high. Blue chips are rallying and people in general are getting excited about stocks once again.

The topic that frequently pops up among friends is how long can the stock market rally continue and what stocks to buy.

As to how sustainable the rally is, nobody really knows the answer. At best, most can only hazard a guess but the opinions would mostly be within the two extremes, depending on whether the person giving the advice is a bullish investor or a bearish one.

As for what stocks to buy, there are plenty of suggestions given the bountiful number of stocks that are two-, three- or even four-baggers today compared with just a few months ago.

But a common theme has emerged amidst all the hoopla. Investors are now literally begging to reward companies that have or are showing a little vision and are putting their cash in expansion.

Companies having excess cash is a worldwide phenomenon. Over the past few years, many companies have strived to improve productivity without spending excessively and this, together with a robust global economy, has led to a swelling of cash balances.

And to manage their excess cash, many companies have raised dividends.

But in a bull market, dividends are just the icing on the cake. Investors are looking for earnings growth and are willing to pay for a potentially big jump in earnings a few of years from now.

Looking at the big-name winners so far, this is at least partly unfolding.

Genting Bhd, by expanding into Singapore and Macau, has captured the imagination of many investors. The stock has soared to an all-time high and is a case study on investors paying for tomorrow's earnings.

KNM Group Bhd, which used to be a small cap stock just a few short years ago, is arguably the best-known name in the oil and gas sector currently. The fast-growing company this week inked a joint venture in Saudi Arabia that will put its business on an even faster track.

And then there are the plantation companies, which are enjoying supernormal profits from rising crude palm oil prices.

In this category, IOI Corp Bhd – the industry giant – has performed exceptionally well for a company that only 15 years ago was much smaller than some of its peers. Its growth was fuelled by its ambition to expand, both upstream and downstream.

Expansion, however, does not guarantee returns. Companies, even the blue chips with top quality management, have been known to make wrong decisions.

A promise to deliver explosive earnings is what separates the men from the boys. It is hoped that these companies will be role models for other aspiring companies.